2

We just sold a house and have about $100K in proceeds. The money may need to be available over the next 2-5 years to cover college tuition. We'd like to park it somewhere with these goals:

  1. Preserve capital - it's more important to not lose more than 1-2% of the capital than to have it grow by 3-4%

  2. Need liquidity within 2 years - may need to start tapping some of the money in 24 months

  3. FDIC insured or otherwise extremely unlikely to "go missing"

  4. Some growth, if possible - something that beats the meager <1% of my checking account would be nice

  5. Non-taxable, if possible - my wife and I are in a relatively high tax bracket, so avoiding taxable growth would be preferred

In summary, I'd like to know if an investment vehicle exists that would preserve capital, earn 1-2%, be liquid, and non-taxable. Is this a unicorn or is there actually something like this out there?

8

As soon as you specify FDIC you immediately eliminate what most people would call investing. The word you use in the title "Parking" is really appropriate. You want to preserve the value. Therefore bank or credit union deposits into either a high yield account or a Certificate of Deposit are the way to go. Because you are not planning on a lot of transactions you should also look at some of the online only banks, of course only those with FDIC coverage.

The money may need to be available over the next 2-5 years to cover college tuition

If needing it for college tuition is a high probability you could consider putting some of the money in your state's 529 plan. Many states give you a tax deduction for contributions. You need to check how much is the maximum you can contribute in a year. There may be a maximum for your state. Also gift tax provisions have to be considered. You will also want to understand what is the amount you will need to cover tuition and other eligible expenses. There is a big difference between living at home and going to a state school, and going out of state.

The good news is that if you have gains and you use the money for permissible expenses, the gains are tax free. Most states have a plan that becomes more conservative as the child gets closer to college, therefore the chance of losses will be low. The plan is trying to avoid having a large drop in value just a the kid hits their late teens, exactly what you are looking for.

  • Do you bring up gift taxes because paying into your child's 529 plan is treated differently than simply paying for their school tuition directly? Or are both gifts (even if they're your dependent)? – Joe Jul 13 '15 at 22:49
  • 1
    There is a provision in the 529 law that allows a lump sum contribution from the instruction for form 709: If in 2014, you contributed more than $14,000 to a Qualified Tuition Plan (QTP) on behalf of any one person, you may elect to treat up to $70,000 of the contribution for that person as if you had made it ratably over a 5-year period. The election allows you to apply the annual exclusion to a portion of the contribution in each of the 5 years, beginning in 2014. You can make this election for as many separate people as you made QTP contributions. – mhoran_psprep Jul 13 '15 at 23:23
7

There are some high-yield savings accounts out there that might get you close to 1 percent. Shorter term CDs might also serve you well here- rates are above 1 percent, even with 1-2 year terms: http://www.nerdwallet.com/rates/cds/best-cd-rates/

2

Your objectives are contradictory and/or not possible. Eliminating the non-taxable objective: You could divide the $100K in 5 increments, making a "CD ladder" $25K in 3mo CD (or savings a/c) $25K in 6 mo CD $25K in 9mo CD $25K in 1 yr CD or similar structure (6mo also works well) Every maturing CD you are able to access cash and/or invest in another longest maturity CD, and earn a higher rate of interest. This plan also works well to plan for future interest rates hikes. If you are forced to access (sell CD's) ALL the $$$ at any time, you will only lose accrued interest, none of the principal. All FDIC guaranteed. If non-taxable is the highest priority, "invest" in a tax-free money market fund....see Vanguard Funds. You will not have FDIC guarantee.

0

With 100K, I would dump the first 95K into something lame like a tax advantaged bond or do as the others here suggested. My alternative would be to take the remaining 5K and put into something leveraged. For instance, 5K would be more than enough to buy long term LEAPS options on the SPY ETF.

@ Time of post, you could get 4 contracts on the DEC 2017 leaps at the $225 strike (roughly 10% out of the money) for under $1200 apiece. Possibly $1100 if you scalp them.

4 * $1200 = $4800 at risk. 4 * $22500 = $90,000 = amount of SPY stock you control with your $4800.

If the market drops, SPY never reaches $225 in the next 3 years and you are out the $4800, but can use that to reduce capital gains and still have the $95K on the sidelines earning $950 or so per year. Basically you'd be guaranteed to have $97K in the bank after two years.

If the market goes up significantly before 2018, you'll still have 95K in the bank earning a measly 1%, but you've also got 4 contracts which are equal to $90K shares of S&P 500. Almost as if every single dollar was invested. Bad news, if SPY goes up 20% or more from current levels over the next three years you'll unfortunately have earned some taxable income. Boo freaking hoo.

https://money.stackexchange.com/a/48958/13043

0

Individual municipal bonds (not a fund) that will come to term in 2017 from your state. This satisfies 1, 2, 4 and 5.

It doesn't satisfy #2. These are not insured, and there can be details in each state about whether the municipal bonds are backed up by state general revenues in the event of a municipal bankruptcy; there are two general kinds, "general obligation" backed by the political will to raise taxes if needed; and "revenue bonds" backed by cash flow such as toll revenue, water utility bills and so forth. Municipal bankruptcies are rare but not impossible.

http://www.bankrate.com/finance/investing/avoid-municipal-bonds-that-default-2.aspx

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